What Do I Need to Do to Buy a Home?
We get this question all of the time. In fact, we’ve all been here. You start out as a young twenty-something in the Dallas-Fort Worth area with the dream of home ownership in your eyes and like what happens when you see a puppy, you say to yourself “I want one.” Especially when your friends start hopping on that band wagon. But the process can truly be daunting. Where do you start?
We’ve culled it down to a few simple pages in our new Homebuyer’s Toolkit. Want the FREE guide? Then scroll to the form below. Otherwise read a few snippets from the Homebuyer Toolkit:
I THINK I WANT TO BUY A HOME
This is the best place of beginning because there’s hope, optimism and the drive for accomplishment in these thoughts. And now it’s time to put the thoughts into action. It will be up to you to determine if you are really ready (mentally, physically, and financially) for the total cost of home ownership. You will want to sit down and write out a list of the costs as compared to the benefits of home ownership for you and your specific circumstance. Additionally, you will want to think about your values to start to define your preferences around home ownership and make sure you and your partner, if applicable, reach a consensus:
•Employment mobility – What happens if you (or he/she) want to switch jobs? Are there good prospects locally? How job satisfied are you today? How long are you willing to commute?
•Current and future family needs – Will the 2 bed/ 2bath condo still work after Baby #1 isn’t such a baby anymore? How much square footage do you really need?
•Lifestyle – Do you like yard work or can you afford to pay someone every two weeks to mow? Are downtown views from a balcony a must? Must there be a hip, local dining spot to nosh and be seen at?
•Maintenance and repair - Do you have an appetite to make any improvements? How handy are you? Can you afford to call someone out every time something breaks?
•Schools – Is public or private school acceptable?
•Neighborhood – Do other people value home ownership in the same way you do? Do you value or have a high need for diversity? Are there parks and other opportunities for public recreation – easy access to trails, library, retail, etc.?
This list is not exhaustive but it is a pretty comprehensive one and a great place to start.
HOW WILL A LENDER EVALUATE ME?
Getting a mortgage is one of those necessary evils if you aren’t cash rich. And like almost all of us are not, so you are no different than the next human. No shame in the game there. There are several points of evaluation that play a critical role in the lender’s decision to lend.
Income – From where and how often you get your money – Lenders require you to provide W-2’s for the past (2) years from your current and/or past employers, and (2)-(4) of your latest pay stubs. You may also be required to provide (2) years of tax returns. If you are self-employed, you will definitely be required to show (2) years of tax returns. You will want to make sure that you have been paying yourself, first, and then paying yourself consistently to show income. Your lender may have other specific requirements (or you may have additional income sources) but just remember that consistency and frequency matter the most.
Debt – Making sure you pay on time and are not overloaded – If you are maxed out on all of your credit cards and having a difficult time making payments it will be hard for your credit score to keep up. You will want to keep all of your credit card balances below 30% of the total amount of extended credit, this is called credit card utilization. Installment accounts should be paid on time. Also, potentially consider that your car may interfere with your ability to get a house. You may need to ask yourself; do I want more car or more house? Real-life.
Debt to Income Ratio – The magic ratio that looks how much you earn as compared to how much you owe. The trick is to keep this below 43%. 35% is a great target in order to be considered for better interest rates.
Credit - The overall score matters – FHA underwriting guidelines specify a minimum credit score of 630. Anything below this will disqualify you from consideration but paying down debt to improve your credit card utilization and bringing accounts current is a great step toward repair.
HOW MUCH HOUSE CAN I AFFORD?
This is where the rubber meets the road. In addition to your lender’s evaluation, you need to also take a look at “your numbers.” Your lender will tell you how much they will lend, but it may not be the whole picture toward how much you can and actually want to afford.
You will need to conduct a budgeting exercise after receiving their maximum purchase price. While their number accounts for principal and interest on your loan, in addition to property taxes and insurance, it does not include a monthly reserve toward maintenance expenses, utilities, the amount of money you save every month, or your slush fund for that awesome vacation you like to take every year. We’ve got to account for our desired life experiences too, right? All of this is super important. Trust me, you are better off being right-sized or down-sized for your home than you are being house rich and cash poor.*
*P.S. This is one of those nuggets of wisdom you should live by.
Like what you see here? Learn more about our Buyer Services and get the full, free HOMEBUYER TOOLKIT from the Megan K Johnson Real Estate Team. Want to talk about your home goals with someone? Contact Us today!
